Setting the reserve price is one of the most important tasks of an auctioneer in developing plans for a spectrum license auction. The reserve price sets the minimum proceeds for Governments and sets the floor for the auction in terms of compensation received for use of an important public resource. Even though there will be a competitive auction process to determine the final price for the licenses, the Government may – intentionally or otherwise – e deciding what the market value is when it sets the reserve price.

The reserve price is doubly important in the world of combinatorial clock auctions (CCAs). CCA processes award licenses on the basis of the “second” price and the best second price could very be at or close to the reserve price. So one way to try to ensure higher revenues from the auction is to increase the reserve prices. In the 3G auction held in Thailand in October 2012, the Government decided to triple the reserve prices when it became apparent that there would be little competition for the licenses, and hence they would likely sell very close the reserve price. This played out with the Thai Government receiving auction revenues of just 3% more than the revised higher reserve price.

Of course this is a double-edged sword… If the reserve price is set too high, this may discourage bidders from participating in the auction altogether. This may occur in Australia where, last week, the Government decided that the reserve price for its 700 MHz Digital Divided auction would be virtually identical to the US 700 MHz auction result from 2008. No other Digital Dividend spectrum auction to date has matched the US 700 MHz result, which has set the high water mark for 4G licenses of any kind. All subsequent auctions for digital dividend spectrum have so far resulted in lower values. And the reserve prices set in the UK and Canada for upcoming auctions are similar; both about 60% below the US 700 MHz auction result.

On the other hand, if reserve prices are low and if there is also lower competition in bidding, auction revenues will be lower. This appears to have been the case in the Swiss multiband auction held in February 2012. In that auction there were three bidders bidding on 61 spectrum blocks. The The three bidders were incumbent operators, and the auction proceeds were 1.65 times the reserve price. The multiband auction held this fall in the Netherlands stands in stark contrast. The reserve price was set lower than that in Switzerland. However, the Dutch auction was designed to facilitate entry by new players, attracting two in addition to the three incumbent operators. One of them – Tele2 – won licenses as a new entrant. The auction was completed on December 14 after six weeks of bidding and the greater activity in the auction led to proceeds of some 8 times the reserve price.

So while one way to try to overcome the risk of low revenues from an auction is to raise the reserve prices, the Dutch auction shows on the contrary that auction revenues can be high when there is a low reserve price, but when combined with auction rules that encourage entry and increased bidding activity.

Overall, setting reserve prices is a tricky balancing act, finding the right answer requires a solid understanding of licenses values, including operator business models, the potential for entry, as well as considering comparable situations from other auctions and the influence of specific auction rules and mechanisms. A core expertise of Lemay-Yates Associates Inc. (LYA) is spectrum licenses valuation, including expert evidence on reserve prices and auction formats. We used an innovative and integrative approach to assessing values for different bandwidths and bands, driven by subscriber ecosystems and usage forecasts. LYA also has an extensive dataset of values from over 140 licensing processes for mobile spectrum held in over 50 countries.